Auto Insurance - How It Works

Anyone who has ever owned a car knows that automobile insurance is expensive.
A survey conducted by the National Association of Insurance Commissioners found
that the average annual premium for each car was $855 (that includes liability,
collision, and comprehensive coverages). Understanding auto insurance is the
first step towards ensuring that you have the right coverage at the best price.

Risk

The cost of your individual coverage depends on many factors -- factors that
the insurance company calls Risks. The lower risk you represent to the insurer,
the lower your insurance will cost. The cost of your insurance will be impacted
significantly by the type of car or truck you buy. A few of the factors that
impact your risk include:

Safety features on your auto.

Crash test results for your auto.

Average repair cost for your auto.

How many miles you drive each month.

If in school, your grades may impact your cost.

Your age (younger drivers statistically have more accidents.)

Your gender (males typically have more accidents than females.)

Your geographic location.

Your driving record.

Your marital status.

How you use your vehicle.

The make and model of your vehicle.

Your claim history.

Reducing the Cost of Your Auto Insurance

You can often significantly reduce your auto insurance coverage costs by taking
advantage of discounts offered by insurers. Discounts are available to drivers
who seem like better risks to insurance companies. Look for the following types
of discounts when pricing your insurance needs:

Insure all your vehicles with the same insurer.

Insure your home and car with the same insurer.

Consider purchasing your life insurance coverage and car insurance from
the same company.

Take a driver's education course.

If in school, get good grades.

Buy a car with safety equipment like air bags, automatic seat belts, and
antilock brakes.

Invest in antitheft devices.

Keep your mileage low. The less you drive, the less risk you have of being
in an accident.

Drive safely. A good driving record is your most valuable cost cutting opportunity.

Coverage

Many features of your auto insurance coverage will be based on your state of
residence, but many are the same across state lines. Here are a few coverage
options you will have to consider:

Liability Insurance: This coverage protects the owner against losses
from legal liability arising from bodily injury or property damages caused
by an accident. This coverage can be in one single amount for each accident,
or it can be broken down and "split" such as $50,000 / $100,000
/ $25,000 (per person / per accident / per property damage.

Medical payment coverage: This provision covers medical and/or funeral
expenses incurred though bodily injury resulting from an auto accident. The
coverage is generally $5,000 to $10,000 per person per accident.

Physical Damage Coverage: This helps to cover the physical damage
to the insured auto. Collision covers collision costs. Comprehensive covers
losses from non collision incidences. Some examples of this would be theft
or storm damage. Policy limits for physical damage are generally based on
the value of the insured automobile and are typically limited to the lesser
of repair cost or actual cash value.

Uninsured/Underinsured Motorist: Although most states require car
owners to have insurance, some motorists do not. Uninsured motorist coverage
pays for injuries sustained in an accident with an uninsured (or hit and run)
driver. Uninsured motorist insurance covers the difference between actual
losses sustained and what an insured can collect from an at-fault driver,
up to policy limits.

Endorsements

In addition to standard coverages, you may want to consider additional coverages
called endorsements. Two of the most common are:

Extended Liability: This insurance is used to cover automobiles that
are not legally owned by the insured, such as an auto owned by the employer
but furnished for the use of the insured, which would not generally be insured.

Miscellaneous Type Vehicle Endorsement: This insurance allows other
vehicles to be covered such as motorcycles, campers, golf carts, snowmobiles,
etc.

Other Considerations

When purchasing auto insurance or in reviewing your existing
policies, there are some general considerations you will want to be aware of.
Make sure the policy provides as much protection as is necessary. Know the maximum
dollar amount the insurance company will pay. Be aware of your deductible amount,
which is the amount you must pay before your insurance company will pay anything.
Know what your responsibilities are if an accident occurs.

Material discussed is meant for general illustration and/or
informational purposes only and it is not to be construed as tax, legal, or
investment advice. Although the information has been gathered from sources believed
to be reliable, please note that individual situations can vary therefore, the
information should be relied upon when coordinated with individual professional
advice.

This web site may contain concepts that have legal, accounting and tax implications. It is not intended to provide legal, accounting or tax advice. You may wish to consult a competent attorney, tax advisor, or accountant.